Allocation of employer contribution

[ErisaGooroo]

Is it permissible for an employer to allocate an employer non-elective contribution based on account balance rather than compensation?

[My 2 cents]

Is it permissible for an employer to allocate an employer non-elective contribution based on account balance rather than compensation?

Are they able to demonstrate that it is non-discriminatory relative to current compensation? Even if they can, sounds unlikely.

[ErisaGooroo]

My first thought is nondiscrimination and satisfying 401(a)(4) but how would that even work? The terms of the plan document provide for a pro-rata non-elective formula. If it is permissible to do, I imagine the plan document could be amended to allow for a 2nd allocation based on account balance rather than compensation - but then again how does it satisfy 401(a)(4)?

[Tom Poje]

how does it satisfy 401(a)(4)?

you would have to run the testing. I imagine on an allocation basis you would fail testing as HCEs general have larger account balance so would receive a larger % of pay by the time you divide contribution by compensation.

so now you test on an accrual basis, but that also requires you pass the gateway minimum

as for the document, is it possible to allocate a contribution based on balances? if each employee is in there own rate group, then there is certainly nothing to prevent you from allocating a contribution which, for all practicality is based on account balances, but again, you will be doing crosstesting, gateway minimums, etc.

[ErisaGooroo]

Thank you both! Have a great week.